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2012 Outlook: Crude Oil Prices Could Rise This Year, But Prices Could Be Very Volatile

(Kitco News) - Crude oil prices could rise again this year, but how much and how far depend on a multitude of factors, including economic growth, what happens with Europe and geopolitical issues.

Demand from emerging markets should stay firm and there are numerous supply-side risks because of geopolitical issues. Because there are so many potential influences in the oil market, both from its own fundamentals and outside influences, that market analysts advise potential investors to be nimble and pay attention.

TD Securities summed up the feeling of many energy market watchers: “The 2012 commodity strategy is anything but clear, as macroeconomic, geopolitical and physical supply/demand fundamental factors all seem to point in different directions… we expect 2012 to be a very volatile year, with tail risks looming particularly large.”

PRICES ROSE IN 2011

ICE North Sea Brent Blend crude oil prices lead the complex to the upside in 2011. Brent prices gained about 16% last year, with New York Mercantile Exchange gasoline prices up about 15.7%. Nymex West Texas Intermediate crude oil rose 7.8% last year.

As 2012 dawns, market watchers said that the main event to heed on the demand side is the developing situation in Europe and whether or not policymakers there come to some agreement on how to deal with their sovereign debt overhang. On the supply side, geopolitical events could drive direction, with Iran and potential sanctions on the country from the U.S. and Europe at the top of the list.

SEB Commodity Research, part of the Swedish bank SEB Merchant Banking, said crude oil prices should remain at elevated levels in 2012, with Brent prices around $114 a barrel. That compares to Brent prices of around $111 as of early January.

Not everyone is so positive on prices. TD Securities estimated WTI crude oil prices to average $95 a barrel in 2012, with Brent at $105. Similarly, Morgan Stanley sees Brent prices around $100 in 2012. Nymex crude oil is trading around $102 now.

The likelihood of a European recession and the potential knock-on effects on the rest of the world could pressure crude oil prices, analysts said. Even if the U.S. manages to avoid any contagion from Europe, growth in the U.S. should be sluggish. Lastly, China is still dealing with the ongoing effects monetary tightening. Even with these headwinds, Brent prices shouldn’t fall under $100, SEB said.

Morgan Stanley said they are bearish on crude oil in the near-term because energy demand is highly dependent on GDP growth. The firm said supplies should recover and demand slow in the first half of 2012, and the combination of these two events could drive prices lower. Their bearish case puts prices at $75 for Brent oil.

TD Securities said the worries over Europe should result in similar trade in the first part of 2012 as what’s hallmarked the last few months of 2011, a move away from risky assets and into safe havens. Crude oil will be counted as a risky asset in this case. The second half of 2012 could see prices rebound, all three firms said, especially if Europe solves its woes.

“We remain constructive on crude over the medium term and believe structural supply constraints will reassert themselves,” Morgan Stanley said.

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